Economics

Word Limit: 1750 words.

A. Assume that you are a member of the Bank of Japan (30]) board of governors in
1998. The president of Bo] announces that he is thinking of applying Quantitative
Easing (QE).
1) In your view, what could be the reasons behind this decision?
(20 marks)
2) What are the potential advantages and disadvantages of QE? Discuss critically.
(20 marks)
B. Assume that the Minister of Finance is responsible for fiscal policy and the Central
Banker is responsible for monetary policy. Each policy maker has two choices; either
to follow a contractionary (tight) or an expansionary (easy) policy. In 2005, the
choices were as described in Table A (with the numbers within the matrix showing
the payoffs to each policy maker):

Table A-2005

Minister of Finance

-_-

Central Banker
In 2010, the choices were as described in Table B:

Table B-2010

Minister of Finance

-_-
Central Banker

1) What is/are the Nash equilibria in each year? Explain your answers.
(40 marks)
2) Assume that you are a Government Advisor and you are asked to give a policy
report. What will you write in such a report regarding the tools for the chosen
policy combination in each year? Discuss the advantages and disadvantages of the
policy tools in each case.
(20 marks)
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